The outlook for Emerging Markets (EM) going into 2014 is dramatically better than at the start of 2013. Better fundamentals, stronger technicals and attractive valuations after a sharp technical sell-off in 2013 will lure investors. Tapering also poses less risk now, while many EM countries are now taking reforms very seriously. The way to approach this opportunity is through active management, because credit stories and elections feature prominently in the 2014 outlook.

EM growth will start 2014 on a positive note in sharp contrast to the soft momentum going into 2013. Last year’s weak start was due to a synchronised downturn in global manufacturing that equally afflicted developed economies, but EM growth began to expand in the second half of 2013 and has continued to pick up since. In fact, 2013 was the year of the EM crisis that never happened: price action notwithstanding none of the ‘Fragile Five’ actually blew up and China failed to land hard. The majority of the 65 investable countries in EM grew comfortably close to their trend growth rates, despite ugly sentiment and price action. Looking forward, EM growth will be lifted by a generalised global upturn. Growth of 5.5 per cent in 2014 is quite realistic compared to 4.5 per cent in 2013. Yes, growth is slower than in 2010-12, but does anyone seriously expect bounce backs from 2008-09 every year?

The technical position in EM markets is significantly better than at the start of 2013. Indeed, after the biggest inflows into the asset class ever in Q1 2013 the asset class experienced almost eight consecutive months of outflows following the taper tantrum. Most of these outflows were from retail accounts, fast money, cross-over investors, and weaker hands among institutional investors, who still prefer to buy at the top and sell at the bottom. Yet, as we head into 2014 the asset class has gone from heavily overbought in April 2013 to now significantly oversold. Flows may take time to turn, but the technical position already bodes well for performance in 2014.